Consider a portfolio comprised of four risky securities.Assume the economy has three states with varying probabilities of occurrence.Which one of the following will guarantee that the portfolio variance will equal zero?
A)The portfolio beta must be 1.0.
B)The portfolio expected rate of return must be the same for each economic state.
C)The portfolio risk premium must equal zero.
D)The portfolio expected rate of return must equal the expected market rate of return.
E)There must be equal probabilities that the state of the economy will be a boom or a bust.

Question

Quizplus · Accepted Answer

A portfolio variance of zero implies that there is no risk associated with the portfolio, which can only occur if the expected rate of return is the same for each economic state. Therefore, the only option that guarantees a portfolio variance of zero is B, where the portfolio expected rate of return must be the same for each economic state.

Consider a Portfolio Comprised of Four Risky Securities